Fiserv Inc

NYSE:FI

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Fiserv 2020 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session that begins following the presentation. As a reminder, today's call is being recorded.

At this time, I will turn the call over to Peter Poillon, Senior Vice President of Investor Relations at Fiserv. You may begin.

[Peter Poillon, SVP, IR]

Thank you, Ivy. And good afternoon everyone. With me on the call today are Jeff Yabuki, our Executive Chairman; Frank Bisignano, our President and Chief Executive Officer; and Bob Hau, our Chief Financial Officer.

Our earnings release and supplemental materials for the quarter are available on the Investor Relations section of fiserv.com. Our remarks today will include forward-looking statements about amongst other matters, the impact of the COVID-19 pandemic on our business, expected operating and financial results, strategic initiatives, and expected benefits and synergies from the First Data acquisition.

Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. Please refer to our earnings release and supplemental materials for today's call for an explanation of the non-GAAP financial measures discussed in this call along with the reconciliation of those measures to the nearest applicable GAAP measures.

Unless stated otherwise, performance references made throughout this call are year-over-year comparisons and all references to internal revenue growth are on a constant currency basis. Also note that the 2019 non-GAAP financial measures in our earnings release and supplemental materials have been prepared by making certain adjustments to the sum of historical First Data and Fiserv GAAP financial information for periods prior to the acquisition date.

Lastly, a reminder that we're holding an Investor Day on December 8th, given the current environment and to ensure the health and safety of attendees, we've made the difficult decision to host the event virtually. We look forward to sharing our strategic vision with you at this important event and we'll share the details of our broadcast on the Investor Relations section of our website.

And now, I'll turn the call over to Jeff.

[Jeff Yabuki, Executive Chairman]

Thanks Peter. And good afternoon everyone.

As you can see, we delivered excellent results this quarter and once again are setting the standard for performance in these difficult and uncertain times. Our strong performance is a testament to the collective power of the more than 40,000 Fiserv associates around the world, who are committed to serving clients with passion and excellence. Your company has stepped up beautifully, and is well down the path to achieving the promise of the transformational combination of Fiserv and First Data, which closed only 15 months ago.

We have the strongest solutions, significant synergies, market momentum and a $500 million incremental commitment to innovation, which have come together to propel market leading results in these unprecedented times. The strength of our business has been front and center in the midst of global economic turmoil.

The model has proven far more resilient than many anticipated, as we fully expect to achieve our 35th consecutive year of double-digit adjusted earnings per share growth and are positioned for far stronger performance for years to come.

I've been privilege to lead this company for nearly 15 years and I'm proud of what the team has done to create a platform for future success. I can tell you unequivocally that where we sit today is the best we have ever been positioned to deliver sustained growth and value for our clients, associates, and you, our shareholders.

Frank and the entire leadership team are the right people at the right time to convert the opportunity ahead into our collective reality. We look forward to sharing much more with you on December 8th.

With that, let me turn the call over to Frank.

[Frank Bisignano, President and CEO]

Thanks Jeff. And good afternoon, everyone.

Today, when I say thanks to Jeff, it's the friendship and partnership. It is also for the 15 years of great leadership and strategic vision for Fiserv. It also represents a thank you from all the constituents, our associates, our clients, and our shareholders. Today is Jeff's last earnings call, but his landmark leadership of this great company will last forever. Once again, thank you, Jeff.

When Jeff and I met back in late 2018, one of the benefits we saw in the merger would be the potential power and resiliency of the combined business and the advantages we could expect in the event of a challenging economic environment.

Neither one of us contemplated the global pandemic and the resulting economic implications we have faced in 2020. And yet, for the first nine months of the year, amid one of the worst economic downturns in the past century, we've grown our adjusted EPS by double-digit, sustained internal revenue, expanded our adjusted operating margin, and generated very significant free cash flow.

For the quarter, internal revenue growth was 3% led by our Merchant Acceptance segment of a very strong 6%. Adjusted operating margin for the quarter was up 310 basis points and more than 400 basis points sequentially.

Adjusted earnings per share in the quarter increased 19% and is now up 11% through September 30th. Free cash flow was again excellent coming in at $939 million in this quarter and totaled $2.6 billion year-to-date. Over the trailing 12 months, we've generated $3.6 billion of free cash flow. To put that in perspective, this is equal to the proforma combined free cash flow, which included the full run rate value of the synergies, delivered nearly four years earlier than expected.

Our ability to both increase and accelerate synergies along with the overall strength of the business has combined to deliver these outstanding results. After a terrific second quarter, sales were strong again in the third quarter, up 27% with great results in our credit processing merchant acquiring and output solutions businesses.

Sales year-to-date were up 23% and the pipeline remains strong going into Q4. Our sales teams have transitioned to the current reality of selling in a virtual environment and the enhanced value preposition of the merger is resonating incredibly well where it matters the most, in the client's office.

As you saw, we kicked off Q4 by signing a long-term agreement with Alliance Data, the fourth largest card issuer in the U.S. by accounts to outsource processing for their co-branded and private label card programs. This important partnership further Valor dates, the differentiated value that we are delivering to the changing credit issuing landscape across our broad suite of innovative technology solutions, digital leadership, and commitment to client partnership.

It is an absolute privilege to serve Alliance Data, and we look forward to working together for many years to come. As you heard last quarter, we signed Genesis Financial and Atlanticus Holdings in July, Both top 25 insurers. That combined with Alliance Data, is a clear sign of the very strong momentum in our credit issuer business in the U.S.

Globally, a leading vision platform also continues to win around the world, signing Federal Bank in India, Bank of Queensland in Australia, and Valley in Mexico. Integration continues to go very well. Although we will provide a full update at Investor Day, let me briefly update you on our synergy results, which are well ahead of original expectations. Through September 30th, we've already actioned $875 million of about $1.2 billion cost synergy target.

Importantly, we expect to enter 2021 with a run rate of more than $800 million of annual P&L savings. Comparatively, you will recall that we had originally targeted a total of $900 million over a five-year period. We've also actioned more than $185 million in annualized revenue synergies through September and fully expect to achieve over our $600 million goal.

Our Network Solutions have driven a meaningful percentage of our early success, as we lay the groundwork for additional revenue growth over the next several years. The combination of Accel and STAR networks makes us the clear number three debit network and when connected to our other market-leading solutions, should unlock new areas of growth and innovation for many years.

Another of our top synergy opportunities is to deliver our world-class credit processing services to our core account processing client. In the quarter, we were pleased that Golden 1 Credit Union, the seventh largest credit union in U.S. went live with the cards payments bundle, including credit and debit processing, debit network and ATM Managed Services, which provides its members a consistent and integrated cardholder experience.

Our bank merchant synergy program also continues to make strong progress. In October, we signed our 200 financial institution since the merger. In the third quarter, we added 35 new bank merchant clients, bringing the total to more than a 130 new clients this year with about 60% of those as compared to takeaways. We have increased the pipeline to more than 500 financial institutions for one of the most important opportunities for the combined company.

We are privileged to have both the direct and partner distribution model for our merchant solutions, which allows us to cover the sales landscape across all business types and sizes. Next month, Verizon will begin marketing our new merchant solutions to its large portfolio of SMB customers.

Utilizing an exclusive Clover Flex terminal integrated with Verizon wireless technology. We also expanded our strategic partnership with Paychecks, a leading provider of human capital management solutions, including payroll services to more than 680,000 businesses in the U.S. to deliver merchant capabilities to their base of clients.

This partnership is a perfect complement to Clover, as both services are widely used by SMBs. We continue to see stellar results through our Clover platform with gross payment volume in the quarter of 30% to $33 billion. Momentum continued to be excellent in the digital enabled segments of our merchant business, which includes e-commerce and ISV Solutions. We added 42 new global e-com clients in the quarter and a 128 year to date, a 41% increase over the prior year.

Additionally, we signed more than a 130 new ISVs so far this year and have seen a nearly 40% increase in new active merchants through our ISV channel. Globally, Clover's transactions were up about 25%, both in the quarter and year-to-date. Our e-commerce solutions have continued to grow with the significant focus on our direct business.

We will provide you with important insights into the size, scale, and reach of our digital acquiring business at our Investor Day, which we believe will provide important context on both our direct and overall position in the current market structure. We renewed a number of key client relationships in the quarter with household names, who value the breadth and depth of our solutions across both physical and digital presence, including Costco, Dunkin' and McDonald's.

We continue to expand the number privileged relationships we have in our account processing businesses across financial institution of all sizes and are seeing strong success with financial institutions with assets greater than $1 billion, de novo banks and fintechs. We signed 12 new core account processing clients in the quarter, bringing the total to 41 for the year, including 20 on DNA.

We have signed six de novo banks this year, including signing First Women's Bank through our premier platform in the quarter. We're particularly proud of this new relationship, as First Women's Bank is a commercial bank with the primary strategic focus on lending to women-owned businesses.

Lastly, even in these challenging times, we continue to invest for growth, including deploying some of the $500 million innovation commitment we made as part of our combination. We have already delivered solution in areas such as advanced card fraud, digital disbursements, and several unique innovations to support the touchless shopping experience across our digital merchant solutions. We look forward to sharing more on this important topic at our Investor Day.

With that, let me pass the discussion to Bob for more detail on the financial results.

[Bob Hau, CFO]

Thank you, Frank. And good afternoon everyone.

We turned in a very strong performance in the quarter even as COVID-19 continue to pressure the global economy, demonstrating the strength and resilience of our business. Total company internal revenue growth was a strong 3% in the quarter with Merchant Acceptance leading the way at 6%.

Year-to-date, internal revenue was flat with the prior year pressured by multiple impacts of the COVID-19 on our business, partially offset by better-than-anticipated growth from revenue synergies, which were $49 million in the quarter and $114 million year-to-date. We now expect about $150 million growth from revenue synergies for the full year, up from the nearly $100 million previously expected.

During our last call, we shared the trends we were seeing at that time, including strong sequential improvement in transactions, each month through the second quarter and into July from the April low. Since August, we've seen transaction growth rates generally stabilize at or around July levels. The current run rate of growth is aligned with our full year expectations for this challenging macroeconomic environment.

Although we aren't providing formal internal revenue guidance, we continue to estimate internal revenue to be plus or minus flat for the full year, barring any incremental large scale economic slowdown.

Third quarter adjusted operating income was up a very strong 9% to $1.2 billion. Year-to-date adjusted operating income decreased by 2% to $3.1 billion, impacted by divestitures and negative impact from COVID, partially offset by strong synergy performance.

Adjusted operating margin increased 310 basis points to 32.9% in the quarter on the strength of $184 million of incremental cost synergies, an excellent performance across each of our segments. Consistent with our comments last quarter, Q3 adjusted operating margin improved 410 basis points sequentially.

Adjusted operating margin increased 80 basis points to 29.9% through September 30th, driven by the strength of our business and excellent synergy execution, which we dramatically accelerated to help mitigate the impact of the pandemic.

Our cost actions are largely focused on synergy acceleration and not on actions that deliver short-term benefits, which would bounce back in subsequent years. We expect that our margin improvements are sustainable and should continue into the future. Third quarter adjusted earnings per share was up 19% to $1.20 compared to $1.01 in the prior year, as adjusted for the investment services transaction that closed in Q1.

Adjusted earnings per share through September 30th has increased 11% to $3.12. Given where we are today, we fully expect to achieve double-digit adjusted EPS growth for the 35th consecutive year. As you heard, free cash flow in the quarter was excellent, up 12% to $939 million and up 13% to $2.6 billion year-to-date. Free cash flow conversion for the quarter was 115% and is a strong 122% year to date.

Looking into the segments, internal revenue growth in the Merchant Acceptance segment was a strong 6% for the quarter. Our results were bolstered by strong performance from our flexible Clover platform, our global suite of e-commerce and omnichannel solutions, and our leading suite of ISV Solutions. Clover gross payment volume grew 30% to $33 billion in the quarter, and more than $130 billion annualized and active merchant outlets increased nearly 10% sequentially.

While the growth rate has not fully recovered to pre-COVID levels, it is impressive given the economic environment and considering the Clover tends to serve small and medium-sized merchants, which are later in the recovery cycle. We continue to extend the breadth of services to Clover merchants with innovative solutions that enhance convenience like scan to order, which was launched recently to allow consumers to scan a QR code to order and pay directly from their table.

Our integrated payments or ISV business is performing very well with adjusted revenue growth of nearly 50% in the quarter and is approaching pre-COVID growth rates. Our differentiated solutions for both ISVs and their merchants are driving excellent results and we expect this business to be a strong grower for many years.

Adjusted operating income in the Acceptance segment increased 8% to $425 million in the quarter. Adjusted operating margin was up 180 basis points in the quarter to 29.2%. Year-to-date adjusted operating income was $931 million and adjusted operating margin was down 370 basis points to 23.5% due to the revenue impact of COVID.

On our second quarter earnings call, I shared our expectations that the segment margin would improve significantly in the second half of 2020 by more than 800 basis points sequentially, with the majority of that benefit expected to come in Q3.

The adjusted operating margin in the quarter was up over a 1,000 basis points, primarily driven by improved revenue including the timing reversal of the network assessment fees, compared with the first half of the year, which will not be as pronounced in the fourth quarter.

Adjusted operating margin improvement was also driven by continued progress in cost synergies and BAMS cost benefits. The Fintech segment saw internal revenue in line with the prior year's quarter, as growth in high quality recurring revenue was offset by much lower periodic revenue and specifically termination fees, which created about 300 basis points of headwind to internal revenue growth in the quarter.

Importantly, processing revenue was up 5% in the quarter, which demonstrated the scale and leverage in the business. Year-to-date internal revenue is also in line with prior year. We continue to see strong demand for our broad array of digital solutions. Total mobile subscribers across our leading digital platforms Mobiliti and Architect grew 15% in the quarter to more than 11 million users.

Despite the pandemic, we implemented more clients on Architect than in any previous quarter, which should help bolster growth into 2021. Adjusted operating income was up a very strong 19% in the quarter, the $265 million and is up 11% year-to-date, the $721 million. Adjusted operating margin increased 600 basis points in the quarter, the 36.4% on a combination of growth in processing revenue, operational effectiveness benefits, and cost synergies.

Year-to-date adjusted operating margin was up 390 basis points, the 33.4%. We continue to deliver client value across this highly scaled business with increasing efficiency and effectiveness, partially offset by the decline in periodic revenue. We are also pleased with the synergy benefits, which are positively impacting segment performance in areas such as technology infrastructure and procurement.

The Payments and Network segment, internal revenue growth was 1% in the quarter and up 4 percentage points sequentially. Growth in our card services and output solutions businesses including the benefit of revenue synergies was partially offset by COVID-driven weakness in our prepaid, credit processing, and biller businesses globally.

Internal revenue through September 30th is in line with prior year. The revenue improvements we saw throughout the second quarter continued into third quarter. We were especially pleased to see a normalization in our debit business in the quarter, as transaction growth was back to mid-single digits in the quarter and up significantly over the second quarter.

We continue to see excellent transaction growth in solutions such as account transfers and P2P, which again were nearly doubled compared to the prior year's quarter and up 21% sequentially. The number of clients live on Zelle grew more than four-fold compared to a year ago and we expect to see meaningful growth across our electronic money movement solutions, as consumers move money in a more real-time world.

Adjusted operating income for the segment was strong, up 8% to $608 million in the quarter and is up 6% to $1.7 billion through September 30th. Adjusted operating margin was up 310 basis points, the 43.5% in the quarter and was up 280 basis points to 42.3% year to date.

The positive impact of revenue synergies, operational efficiency, and cost synergy performance is driving our strong bottom line performance. The adjusted corporate operating loss was $117 million in the third quarter with the year-over-year and sequential increase in the quarter driven primarily by timing of variable compensation and incremental COVID expenses.

The adjusted effective tax rate in the quarter increased as expected to about 23% compared to 22% in prior year period. Our adjusted effective tax rate through September 30th is 20.5% and we continue to expect our full year adjusted effective tax rate to be generally in line with the prior year. As we shared last quarter, our capital allocation focus for the second half of the year is debt repayment, after repurchasing 14 million shares for $1.4 billion in the first half of the year.

We repaid $769 million of debt in the quarter, $1 billion year-to-date and expect to pay down at least $1.5 billion for the full year. Total debt outstanding was $21.3 billion at September 30th and debt to adjusted EBITDA, dropped to 3.7 times. We are well on track to achieve our leverage target in the second half of 2021 on the basis of both strong adjusted EBITDA growth and debt repayment.

We remain fully committed to our longstanding capital strategy, which includes maintaining a strong balance sheet, organic investment in innovation, high value acquisitions and most important, share repurchase remains our primary benchmark for capital deployment.

With that, let me turn the call back to Frank, for our financial outlook for the rest of the year.

[Frank Bisignano, President and CEO]

Thanks Bob.

As we mentioned, we saw a solid rebound off the trough of April into early August and seen that consistent level of performance through last week. Looking at the business environment, our client conversations continue to be quite encouraging and generally centered on helping them grow their business, reducing their operating costs and better serving their customers, right in the real house of what we do.

As we had discussed on the last quarterly call, our back-to-business program to help minority and specifically black-owned small businesses is in full force, as we advance our nationwide objective, distributing at least $10 million in grants to qualifying businesses.

We continue to see an increased interest in all things digital, whether it is around e-commerce, more card use at point of sale, touchless payments including digital wallets or accelerating P2P payments. We are well positioned to provide the capability our merchants, financial institutions, and business clients' need.

As you've heard, we are pleased with our results to date. Given the current economic backdrop and our strong financial performance, we are raising our 2020 financial outlook for adjusted earnings per share. We now expect full-year adjusted EPS growth of at least 11%, up from the prior guidance of at least 10% over last year's adjusted level of $3.95 or at least $4.37 per share for the full year.

As we stated previously, our outlook does not contemplate the second wave of shelter orders or other circumstances, which creates significant incremental economic duress in the last few months of the year with our strong financial performance for both the quarter and year-to-date, as we navigate these unprecedented times.

Our business has shown incredible strength and resilience leading to what we fully expect will be our 35th consecutive year of double-digit adjusted earnings per share growth along with the foundation for even stronger results in 2021. Last, let me thank our more than 40,000 talented associates around the world for their commitment and courage, as we stand together to deliver value for clients, our colleagues, and you, our shareholders.

With that, operator, let's open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from Dave Koning from Baird. Your line is open.

[Dave Koning, Baird]

First of all, maybe as we kind of look at Q4, it seems like you hit easier comps less periodic revenue headwinds, I would imagine across Payments and Fintech, in the merchant it seems like the months have gotten better in the card industry kind of in September, October, is there any reason kind of judging where we are at today, where we would see acceleration in Q4, really across the segments.

[Bob Hau, CFO]

Yes. Dave, a couple of things you point out there. One, as we indicated in our prepared remarks upfront, we saw very nice improvement off the bottoms the low back in April through July and then saw some leveling off into August, September and even through October at this point. And our expectation right now is for that to continue obviously, lot going on in the world, a fair amount of potential variability in that.

From a periodic revenue standpoint, we actually do anticipate continued headwind into fourth quarter, both from the standpoint of terminations and licensing revenue combination of periodic revenue, it will be more pronounced in the Fintech segment, but also seeing some of that in the Payments segment.

[Dave Koning, Baird]

And then just one follow-up. When we think about margins in Acceptance, Q3 was really strong, was there some catch-up kind of that that assessment fees kind of catch-up that would make margins go down sequentially and then into next year, is the baseline level kind of that 28%, 29%, from which to grow or should we think about the full 2019 is the baseline, from which to grow margins next year.

[Bob Hau, CFO]

So the brand assessment fees, we expected to rebound meaningfully in the second half of the year after we come off the difficult second quarter, we saw that absolutely come through in the third quarter and we expected that to bounce more meaningfully in the third quarter, a bit more to come to us in the fourth quarter. So sequentially, you'll see less of a ramp that we did that we got the benefit of in third quarter.

In terms of kind of ongoing margin, I'm not quite ready to give you a guidance for 2021, but I will tell you that in the Merchant segment and quite frankly across the company, we feel very good about the cost actions we've taken, being permanent improvements and as we get revenue growth across a very scale business, we think these margin improvements can hold into the future.

[Operator]

Next, we'll take the question from Tien-tsin Huang from JPMorgan. Your line is open.

[Tien-tsin Huang, JPMorgan]

Really solid results and really liked the new sales growth discussion there. I'm curious if - would you agree that card processing sales activity overall is up and if so, I mean just, can you share maybe why I don't know if you're seeing more off-cycle deals or just clients looking to modernize their systems and maybe just a - to add on to that, just the pricing for some of the newer deals like Alliance Data, anything - any call outs on that. Thank you.

[Frank Bisignano, President and CEO]

Yes, I mean - we had these three big wins and in a general year having one of them would probably be a big deal. I think we spent a lot of time building out our product set and it's, I mean ADS was as big a deal as you're going to find, you take by account size, the fourth largest processor issuer.

So my view on all of this is we have a great technical stack, we have tremendous surrounds, we've demonstrated a world-class-based system and then a bunch of digital around it and it's very appealing to larger issuers right now.

And I think you know ADS was a very competitive process. But those are very, very long-term valuable relationships that we cherish. And I think it well them as having long-term organic growth capabilities and the ability to given what we have inside our house, the great, great ability to fit within the platforms we run. So competitive processes, we've been fortunate in the wins, you know really three top 25 issuers along the fourth largest issuer. And I think it has a lot to do with the investments we made in the business and our maniacal focus on the client.

[Tien-tsin Huang, JPMorgan]

I know it's - three deals is a lot. That's why I wanted to ask the question. So just my quick follow-up, just on Acceptance, you're backtracking the Visa Mastercard volume here, just like you said it would. So I don't know Frank and team, how would you rank sort of the drivers that have sort of gotten to you - gotten you to this point, is it net merchant additions, is it better sales activity, net of attrition, is the Clover I don't know, ISVs a big contributor, but I don't know if there's a way to just rank what sort of gotten you back to this point, where you're seeing sort of good performance benchmarking wise. Thank you.

[Frank Bisignano, President and CEO]

Yes. I think - I think one way to think about is, you know, we grew 10% in 2019. We actually had an industry-leading position. We came into January and Feb and we were low double digits and then COVID hit and we hit to the trough. But when you look at the breadth of our clients from the SMBs to the largest global enterprises that diversity both of client size and the vertical nature of our clients, we're not over indexed to any one piece.

And then, we have a tremendous geographical - geographic diversity. So you put those, and then you put Clover growing at 30% and we all recognize all SMBs are in business, and as Bob has said, probably more late cycle, so we feel very good and the Clover platform has gained tremendous investment in it.

The e-comm business is, which is our own direct business that we're winning those deals and that stack that we've built really is resonating the global presence of it and the omnichannel presence, us having both physical and electronic capability like e-comm giving that omnichannel is really resonated in the client's office and I think our distribution is unparalleled.

If you think about even signing up 200 new bank merchants, since the deal, the great - the great vision Jeff had around this core processing integrating with bank merchant is showing up in the client's office in a tremendous way, and then we got Verizon, Paychecks, Deluxe, so we're a partner of choice.

And you know, look at - we're not at the growth we were per-COVID, but we are achieving a growth we are because of the massive scale distribution and multi-channel capability had been a partner of choice. And so, I think it's shown up all three quarters of this year, just relative to market conditions. I hope that answers it for you.

[Operator]

Our next question comes from Tim Chiodo from Credit Suisse. Your line is open.

[Tim Chiodo, Credit Suisse]

Thank you for taking the question. My question is around the e-commerce business and fully appreciate that. You mentioned we'll dig into this a little bit more at the Investor Day, but the business did quite well in the recent Forrester Wave Report, placing really just behind Stripe and Adyen, which were listed as the leaders and really alongside Worldpay, you guys were both named strong performers.

They gave you high scores in global acquiring and payouts and disbursement and a little bit weaker in APIs and architecture and updates and release cadence, so I was just hoping, you could dig into that ranking a little bit more and talk about the strength and the weaknesses and some of the things, maybe to improve some of the areas that weren't as strong, but with an overall really strong showing.

[Frank Bisignano, President and CEO]

Yes. Thank you. I mean look, I guess the best way to think about it is - is the competitive wins we have and you know, we still are building technology, we'll be building it forever, we're iterating always on it and we're using the power of our data and information and all the other assets we have inside the house.

I think the best way for us to cover it all at that Investor Day, where we work you through the full stack, give you a full look at really, where we sit in the market structure and understand really how strong the e-comm product is that we have and why we're winning in the business that we're winning. So I think that would do it the most justice, but you know, we go head-to-head every day and you know, we win more than we lose by a lot.

[Tim Chiodo, Credit Suisse]

And a quick follow-up and I apologize if I missed it, but the 300 basis point headwind to margins in the Acceptance segment last quarter from the timing of the assessment fees, when that was a, I assume reverse to a tailwind in Q3, did you put a number on what that boost was to margins in Q3 and I'm assuming to your point, we should see a little bit less of that boost in Q4.

[Frank Bisignano, President and CEO]

Yes. We didn't actually size it in the opening remarks. I would say we probably picked up about two-thirds of that in the third quarter.

[Tim Chiodo, Credit Suisse]

Okay. Really helpful. Okay. So roughly 200 basis points or so. All right. Thank you so much. I appreciate taking the questions.

[Frank Bisignano, President and CEO]

Thank you.

[Operator]

Next, we have David Togut from Evercore ISI. Your line is open.

[David Togut, Evercore ISI]

In the fourth quarter and in 2021, would you expect the gap between the mid-single digit debit transaction growth and the 1% revenue growth in Payment and Network segment to start to close.

[Frank Bisignano, President and CEO]

I wouldn't necessarily think about it that way, but if I think about - remember, that has multiple businesses in it right. So you also have business right this moment that are affected by foot traffic, you get the prepaid like - you have TeleCheck businesses and you have elements of RPL that affected - that are negatively affected by COVID.

If you look at sequentially, you know that business improved 400 basis points, it's still - I think you know, we believe that our business is very strong. We love the network. We talked about, you know, all the characteristics, having the number three network. So I would think about that yeah, we're going to grow more.

And you know, I think we're going to talk - that's why, when we get to Investor Day, we'll take you through '21 and medium-term outlook and we feel very, very strong about the Payments segment and all the innovation we have going on in the Payments segment and why our clients on both the merchant and the issuer side are motivated by it.

[David Togut, Evercore ISI]

Looking at the 12 core wins in Q3 and that followed 17 core wins in Q2 for what percentage of those wins was payment capability, a significant component of the decision for the client.

[Frank Bisignano, President and CEO]

Yes. I think - I think the clients are looking at the holistic nature now, the integrated nature and we have moved to which was always there. But even driving it further how we've deliver an integrated bundle and how that integrated bundle will make it easier for the clients to service their clients and in fact, how we serve our clients better.

So they really - they really are completely integrated, it'd be very odd not to see that right now, given the fact that no one else offers the modern core we have debit, credit, merchant solutions, and the digital suite, those digital products are huge in this offering.

[David Togut, Evercore ISI]

Quick final question on Zelle. Just going forward since Fiserv was an early innovator in the P2P space, do you see Zelle becoming more of an ecosystem over time, as we've seen, let's say with Venmo and Cash App.

[Frank Bisignano, President and CEO]

100%. I mean, look at - we have a very long tail of opportunity in Zelle and then how we bring Zelle into the ecosystem and giving the assets within this company, how we utilize them across the payment spectrum and I think you'll hear some of these things at Investor Day and see how we put this together with our bank partners to deliver them investing class payment capability.

[Operator]

Next, we have Matt O'Neill from Goldman Sachs. Your line is open.

[Matthew O'Neill, Goldman Sachs]

Thanks everybody for taking my question. I was just curious, when we think about the extremely impressive piece of cost synergy realization to date, since the close of the deal, understanding you've already increased the target once. You were quickly closing in on the original target that was sort of slated for five years after you guys pointed out less than I think even a year-and-a-half into the deal.

So how do we think about that going forward, are there longer-term incremental cost saves to be realized in the business vis-à-vis data center consolidation, incremental technology etc. or - would that quantifiable synergy target base of $1.2 billion somewhat of an upper bound before getting back to a more normalized level of operating margin expansion following the complete integration of the businesses and I understand I might be jumping the gun a bit on Investor Day, so I apologize in advance.

[Frank Bisignano, President and CEO]

That's okay. That's good. Investor Day would be part of the answer, but you know, look at - we have $1.2 billion - it's $1.2 billion, of which we've actioned $875 million. So when you heard us talk about the effect of our synergies on the P&L next year, I think if you go back to is, think about both these companies pre-merger were very good at operational effectiveness.

And there will be a moment, where we will continue to drive operational effectiveness and it's part of the DNA, whether it's - whether it's used in artificial intelligence, whether it's used in RPA, we continue to bring AI in through many of our service elements and both companies had dimensions of it and we've had the benefit to bring both together.

I mean the standard work of closing data centers and consolidating, which we've done more than 20 so far, that will wind down in Synergy, but we will always drive and operational effectiveness program, and you can count on us talking about that as a regular way of life, they'll be through and we have a deep belief that we are able to improve service, improve quality, while in fact being more efficient and that I think it resonates clients' office, they feel it and it's a way that will run the company going forward.

[Operator]

Our next question is from Darrin Peller from Wolfe Research. Your line is open.

[Darrin Peller, Wolfe Research]

So the top line results on merchant was clearly stronger than expected, I guess just on the Fintech side, to be clear, when we back out, it's fair to back out 300 basis points from term fees, right. And so that would have been a 3% growth rate. You guys have all these wins coming on from new business in DNA and some other platforms. If you could just talk through the tech positioning in that segment, since we get asked about that a fair amount, if you really see Fiserv taking share from, given all the digital banking initiatives and with these wins in bookings, when should - can we see that actually show further acceleration from the, I guess, normalized 3% run rate.

[Frank Bisignano, President and CEO]

Yes, I mean - I mean, you got - you got the issue of the periodic revenue, so we don't have to go through that again, you know, but I do think what you see us is winning in the clients' office and, I think a good way to think about is you know, we have the third party consultant said FIS come out and basically say, you know, if you look at where we sit, we have 40% share in the - in the mid to lower end of the market, right, which we are very, very good at and committed to. Now, we've had bigger wins, you know just boarded you know NYCB, which is a huge client.

But I think you know, we view ourselves over the long haul, as being a market share gainer and I think the company was a market share gainer, and is the market share gainer in the segments. So I think and I want to go back to how we're winning, we're winning because with the bundle. We're winning because of the integrated solution, we're winning because of the digital assets that come along with it.

You heard, Bob, talking about the amount of Architect installs we did and the amount of Architect wins we're having, which all drive ultimately future revenue growth for us. So I think - I think you're going see a lot over the next few years, you'll see a lot on Investor Day of why these businesses are so strong in Fintech.

[Darrin Peller, Wolfe Research]

And then just quickly on the merchant side, we've been obviously surprised up 6% and I know you touched on Clover up 30% and e-comm of 25%. Can you just touch on international, how does that do and maybe if there is anything on integrated payments you can comment on. And really, Frank, the bigger question is if you're seeing in the top of the funnel filled with new businesses enough to offset the kinds of attrition that some might be seeing is kind of market. I guess in another words, if you're taking market share from the banks or anyone else, despite some of the pandemic headwinds. Thanks guys.

[Frank Bisignano, President and CEO]

Yes, I mean, you know, look at - International has a lot of countries in it and every country is different. So I don't - I don't ever think about international, I always think about regions and that's how we run it, and then down countries and different countries have different lockdown situations. But we're winning in the market outside the U.S. And we have strong growth in many cases and innovation both in the electronic space and in the physical space.

And then if you look at Clover and you look at e-comm, what you see is that they have had tremendous investments in their technology. We've had big changes in go-to-market strategy, fundamentally in the clients' office, we're running a very direct business now across the enterprise and we are taking - and we are taking share.

[Operator]

Next we have Ashwin Shirvaikar from Citi. Your line is open.

[Ashwin Shirvaikar, Citi]

Hi Jeff, Frank, Bob, congratulations on the quarter. Good to hear from all of you. So as Peter, not to have him left out. Jeff, it's been a pleasure, hope to stay in touch. My first question is with regards to when we look at Fintech, what are your bank clients telling you about their ability to incrementally invest in their business. In other words, as they pivot faster towards digital offerings, what do you get from the digital offerings, you know is that going to be incrementally enough to have you accelerate meaningfully versus the traditional stuff that you might have done like the other stuff that you might have done.

And there is two parts to it as well, there's a sales part of it, which you've talked about, but also the ramps. We have mixed feedback about the pace of signed contracts actually ramping, so if you could comment on that as well.

[Frank Bisignano, President and CEO]

You know, I can tell you what - what I hear once or twice a day from a bank's CEO or somebody who runs the retail division of a financial institution. Digital transformations fee is one of the most important things they have going on and so I think from a market structure standpoint, we feel that our digital assets and our core coming together in the client's office and transforming and bringing all the other - bringing the debit capability, bringing the credit capabilities, I mean one of the great synergies that Jeff and I knew we had was the capability of bringing credit to smaller institutions and we're seeing it happen, we're converting them every week.

So I think it's digital transformation on all products is bigger than just the core and Fintech, but it's how do they integrate together and to me, I don't think this is about things deciding how much they're going to spend, it's banks figuring out with us how much they could transform, how they operate with their clients, which is way more valuable for them to grow and compete than it is the cost what they need to pay to us and that's how they see it. This is no longer a luxury, the digital transformation, it's a way of life.

And so I think we are in a fabulous position, our clients feel good about it. We have the resource availability. We've shown a fabulous conversion and implementation machine and I think you know all my interactions with people around financial institutions, which happen everyday is there are highly motivated to get as much as digital opportunity and that's what I think about when you think about long-term growth in Fintech.

[Bob Hau, CFO]

Quickly, I'd add, you know, this is an area that we are absolutely investing in, in digital matters, payments, risk capabilities to bring into those financial institutions in our Fintech space and we continue to bring additional products and services and that's helping us win those quarters as well as win digital users that you just talked about.

[Ashwin Shirvaikar, Citi]

And then, you talked about your revenue and the economic assumptions in the near term for 4Q. What about the cost assumptions, at what pace are you bringing costs back and the cost that you took out incrementally, just like many other companies, have you taken the short yet at determining how many of those and what percent of those costs, at what dollar value of those costs are sort of now in the permanent bucket versus temporary that will come back.

[Bob Hau, CFO]

Yeah, absolutely. And I made comments about this upfront. The cost - the margin improvements that we're seeing this year, including the 300 basis point expansion that we had in the third quarter is actually driven by permanent cost out, it's one of the things that we actually talked about a year ago, when we frequently got the question of how will you perform in an economic downturn, never anticipating that it would be driven by a pandemic and shop in 2020 and what we said was, look if we're headed for an economic downturn in the near term, we will have at the time $900 million, now $1.2 billion worth of cost synergies and we've been working since the beginning of the year, particularly as the pandemic hit, we saw the economic downturn coming to accelerate those cost synergies.

And in fact back in mid-March, as when we announced the increase for $900 million to $1.2 billion. So the cost actions that we're taking are permanent cost actions, they're not in reaction to the COVID dynamic that you are seeing from a number of places.

So we're not doing pay cuts or furloughs or things like that that naturally come back into the business, when the economy comes back. That's why we believe the margin improvement is sustainable and we have future opportunity ahead of us, as we continue to drive our cost synergies and then move to operational effectiveness into the future.

[Operator]

And our final question comes from Dan Dolev from Mizuho. Your line is open.

[Dan Dolev, Mizuho]

Thanks for taking my question. So, really nice results in Acceptance and definitely ahead of our expectation. Frank, I know this is something that might be for the Analyst Day, but can you maybe give us a very broad sense of sort of the run rates, organic run rates by segment, heading into next year for the three segments, even ballpark numbers just to help us model would be great.

[Frank Bisignano, President and CEO]

Yeah, I mean, look, we are probably, I don't know - it's good to talk to you Dan, thanks - thanks for being on the call. We're probably like, I don't know, how many days out, probably from Investor Day.

[Bob Hau, CFO]

Probably about five-six weeks.

[Frank Bisignano, President and CEO]

Five-six weeks and we'll, you know, work it, we're going to - we're going to - at Investor Day, we're going to take you through them inside and out, every business, the strength of our e-comm business right, how our segments operate, why our technology prowess is so strong, why we're winning the clients' office, we're going to talk to you about, you know, our long established capital allocation strategy with share repurchase, as the primary benchmark for capital deployment.

So I mean if not, I apologize, because you know how well, I think of you guys, but there is - this isn't the time to do segment, you know, guidance, if I may. But I'll answer your question, if you got one.

[Dan Dolev, Mizuho]

Yes. I actually had another question, really quick one. We did some work on the BofA attrition. Can you maybe give us a very quick update on how it's trending, I think last quarter about the majority of the decline was due to COVID and then about $10 million of that adjustment was due to be a BofA, how is that trending now in terms of that $20 million or so decline year-over-year in the BofA adjustment in terms of the split.

[Frank Bisignano, President and CEO]

Yeah. I think you know if you COVID-adjust, which is a little hard not to say these days, we find our attrition rate to be fundamentally at a - outperform against the industry right now given the stack of technology that we're providing for clients. So we feel really, really strong about what we're doing in the client's office and the product set and the stickiness of our clients.

[Dan Dolev, Mizuho]

Got it. Well, great quarter. Thanks guys. Appreciate it.

[Frank Bisignano, President and CEO]

Good to talk to you, Dan. I'll see you soon. Thank you. And we'll keep - I would like to take this moment to thank everyone for joining the call. I do look forward to us having a great virtual Investor Day with you. And Bob and I look tremendously forward. I would like one more time to, you know, I mean, Jeff Yabuki has been a legend running this company and I think you all been fortunate to follow him and I'm fortunate to follow in his footsteps. So you guys have a fabulous, fabulous night. Thank you.

[Operator]

Thank you all for participating in today's conference. You may disconnect your line and enjoy the rest of your day.